Fund Focus: Commodities

While the world's stock markets have been in turmoil, oil, gold and wheat prices have soared. Gold was selling for $1,000 an ounce at the beginning of last week and petrol for more than £1 a litre.

The cost of a loaf of bread has doubled in ten years as demand from emerging economies grows. But commodities are incredibly volatile - on Thursday, gold slipped through the $1,000 barrier and oil dropped below $100 a barrel. So is now the time to buy into commodities funds?

This 20-year-old fund invests mainly in companies involved in the gold mining industry - making it a highly specialised and high-risk investment. But the returns are impressive: had you put in £1,000 when it was launched in 1988 then today you'd have more than £23,000.

Over three years, it's up nearly 160%. Its current largest investments include companies with gold mines in the U.S., Brazil, Canada and even Papua New Guinea. Over the past ten years, it has outperformed the gold price. And during the past 12 months - a nightmare period for more conventional funds - it is up an outstanding 57.5%.

'This is the original and best retail fund for investing in gold,' says Tim Cockerill. 'It will be volatile but as an all-round play on gold it is first class. 'But there is a lot of speculative money in gold at the moment and, when the financial crisis lessens I expect gold to be less attractive to investors.'

However, Brian Dennehy is far less impressed. He says, 'The fund's up 60% since last summer, and the gold price is now running more than 30% above its long-term trend, suggesting the current run is a bit more mature.'

Launched last summer, this tiny, high-risk fund's largest investments include a Canadian wheat company, a Chinese fertiliser firm and a German outfit that's cornered the market in sugar beet seed.

It's different because it is invested in companies in the so-called 'soft' commodities sector - wheat, corn - as opposed to 'hard' commodities - metals. It isn't directly in the commodities but in companies that produce or process them. The argument in favour of soft commodities is that with a growing world population, added to the scarcity of supply of food, there will be increased profits for those producing the raw materials.

Managed by George Lee, it was launched only a year ago and is currently up more than 22% since then. Darius McDermott says: 'George Lee's case for soft commodities is convincing and I have already added this fund to my personal portfolio.'

Oil and gas are the commodities which hog most of the headlines - and this fund, launched in November 2004, is stuffed full of oil and gas companies, with its largest holdings being ConocoPhillips and Occidental Petroleum.

Over a year, it's up more than 25%. However, it's recently lost its long-term manager, Tim Guinness, who has been succeeded by two former top oil analysts, Jonathan Waghorn and Mark Lacey. Helen Richardson says: 'This fund could have volatile characteristics so should be limited as a small percentage of exposure within portfolios.'

Mr Cockerill says: 'The largest weightings are in the integrated oil and gas stakes with the majority of the fund in North America, which means it will benefit if the dollar strengthens. In the short term I would sell, but after a dip of, say, 20% it might be a good buying opportunity.'

This is emphatically not a fund for widows and orphans. However, its performance figures are tempting: over a year, it's made 33% and over three years 124%. Its largest holding is North American gold company Kinross Gold, the same as BlackRock, Merrill Lynch Gold and General.

Indeed, its top three holdings - Kinross, Barrick Gold and Lihir Gold - are the same as BlackRock's.

It is managed by Ian Henderson, one of the longest-serving fund managers and the acknowledged expert in the commodities field. Mr McDermott says: 'This fund is the definition of a shoot-the-lights-out fund. It's high-risk with big returns - I rate it ten out of ten on the risk scale.'

Mr Dennehy is similarly keen but cautious, pointing out that the gold price is very volatile. But Mark Dampier says: 'There's no sign of industrialisation slowing down - China is building cities the size of London every year - so companies producing the commodities will continue to do well. Ian Henderson is still very bullish - and I see no reason to doubt him.'

Graham Frost of Bestinvest is less keen. 'Ian Henderson has a preference for precious metals, energy, diversified mines and diamonds in that order,' he says. 'I'm concerned that as the fund size has recently increased, his hunting ground of smaller mines may suffer liquidity problems and the fund's outperformance has slowed down.'